Although the accounting tasks for partnerships and corporations involve many of the same essential practices, there are numerous legal differences between how each type of company is organized. Partnerships and corporations both must produce income statements, balance sheets, payroll documents and tax forms, but the methods that fit a small partnership will not apply to a larger corporation, so accountants must pay special attention to the procedures they use to develop these important reports.
Accounting for Corporations: Equity
Individuals or groups who own shares of a company’s stock are known as stockholders. In a corporation, accountants must record stockholder equity in a capital stock account rather than as separate accounts for each stockholder. The corporation's board of directors can choose to distribute earnings to stockholders in the form of a dividend. A dividend account is a temporary account that is debited when a dividend is declared and credited when it is paid. Earnings that are not distributed to stockholders stay with the corporation as retained earnings.
Accounting for Partnerships: Equity
Equity accounting for partnerships is much simpler than for corporations. Each partner maintains two accounts: a capital account and a withdrawal account. The capital account reflects the equity each partner has in the partnership. The withdrawal account shows the compensation each partner receives. Partners can add funds to their capital accounts to increase their equity and withdraw funds for compensation from the withdrawal account as long as these changes adhere to the terms of the partnership agreement.
Accounting for Corporations - Taxes
The Internal Revenue Service looks at corporations as independent taxable entities.. Accountants for corporations must understand where the company's tax liabilities cut deepest and report these findings to upper management. Corporate accountants must also calculate federal income taxes on profits, turn in the proper forms and send in any applicable tax payments. These accountants must also handle tax reports for other participants in the company, including sending out tax forms for dividend income to shareholders.
Accounting for Partnerships - Taxes
Unlike a corporation, a partnership is not a taxable entity. The responsibility for taxes on the partnership are placed upon the individual partners. Accountants for partnerships must prepare reports on Schedule K-1 outlining the equity percentages for each partner, the amount of equity each partner holds and the portion of earnings related to those shares. The partners must pay income tax on those earnings, as well as self-employment taxes, such as Social Security and Medicare.
